5/26/2022 | Childcare & Education

Should I lease my day nursery business or sell it freehold?

Nick Brown, Director and Head of Brokerage in our Childcare & Education team, shares the key differences between selling your day nursery freehold and selling leasehold.

Whilst there are numerous things to think about when considering the sale of your nursery business, if you are a freeholder then deciding whether to lease or sell your freehold is one question that should be at the top of your list! Getting this answer right is very important, as it could affect your short- and long-term potential income, and you also need to tie this in with how buoyant the market is at the time you’re looking to sell in order to maximise overall value.

Preparation is key

My advice from day one is that preparation and getting the correct advice from sector specialist advisors before any sale is crucial so both you and your buyers are clear on your direction of travel. This will avoid ambiguity, misunderstanding and potentially costly delays further down the line.

What might buyers be looking for?

Historically, it could be said that buyers have leaned towards acquiring freeholds where possible, this is mainly because, with a freehold purchase, the buyer owns the bricks and mortar rather than acquiring a lease and the goodwill/fixtures and fittings. Also, if borrowing money, on a loan-to-value basis, buyers have to find less of their own money, because LTV (loan-to-value ratios) are higher for freehold assets in comparison to leasehold assets, with the ownership of bricks and mortar being perceived as awarding less risk to lenders who may seek to use the properties as security against any mortgage or bank loan that may be required by the banks customer.

This all seems very logical but, over the last few years, we have seen what could be described as a shift in market sentiment, with buyers having greater appetite for leasehold acquisitions than ever before, alongside vendors having the desire to retain their freeholds and grant leases to buyers enabling them to retain the asset and enjoy the rental income generated by the lease. The gap between the multiples used to value between leasehold and freehold deals has become much closer.

With inherent property prices increasing to eye watering levels in some parts of the country, some transactions have the potential to look unbalanced and potentially difficult to fund.

An example of this could be if someone was looking at a freehold nursery with an asking price of £2 million, an effective operating capacity for 35 children, and an annual profit of £70,000. The inherent property value makes this look expensive - based specifically on the profits it is producing, which are essentially on a straight multiple approach, that would equate to 28 YP (Years Purchase). In some cases, this is causing buyers to question if they want to acquire a high value property or to simply secure a 20/25-year lease which could allow them to invest their remaining capital into something like a refurbishment or other nursery opportunities.  

Using the property as an ongoing investment

Those who decide to sell their freeholds may find themselves looking for somewhere to put their money which provides a decent return. This is why we have seen a growth in the number of vendors retaining their properties and, instead, selling the goodwill fixtures and fittings and creating a new commercial lease for the incoming buyer to enter into. As a result, not only do they get a lump sum of money for the business itself, but they also retain the property and get an annual rent which is likely to generate a far greater return that the annual return such funds could potentially earn via interest growth alone if funds were merely left to sit in a typical savings account.

Granted this is not going to work for everyone as there will always be owners who plan to retire completely, some who want to draw a line under everything and some who are looking to emigrate. For those of you who need to consider a longer-term income stream, then leasing your asset could be the answer.

If I keep my property now, if I want to sell in years to come, can I?

The short answer to this is yes and, in fact, depending on your buyer and what covenant strength they offer, the investment value of your freehold interest in the property could potentially far exceed the current underlying bricks and mortar value.

You could decide to keep your freehold investment for few years, enjoy the rental income and then sell as and when you need to release a large amount of capital. After a few years, depending on the nature of the tenant, the leaseholder may be interested in directly acquiring the unencumbered freehold interest in title from you, or you could simply offer your freehold investment to the open market where we are seeing some exceptional prices being paid.

When you’re contemplating a sale, there are lots of options – great agents ensure that their clients are aware of all the options and our team takes great pride in sharing its insights and expertise to enable our client to make the very most of the opportunities and prospects that their business awards them, both now, and also with a watchful eye on the future.

This is a very important decision and discussing this at an early stage is paramount. As a business broker, we can help you to explore all your options. For a confidential chat, contact nick.brown@christie.com / 07764 241 316.